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September 2015 Q3(ii)

Y

ykljj

Member
Examiner's comment: "surprisingly large proportion of candidates seem to believe that as a prescribed formula is the same for all companies it is better than an internal model for making comparisons across the market"

Why not? I thought internal model makes it difficult to do comparison between companies as an internal model is built upon each insurer's own assumptions and thus not strictly comparable with one another?
 
It's not a black and white answer I'm afraid, the arguments are a bit more subtle.

The standard formula imposes specific assumptions (standard deviations, correlations etc), which may be more appropriate for some insurers than for others. In contrast, if each insurer uses an appropriate internal model then their SCRs should be more appropriate, hence allowing for a more realistic comparison.

There are also variations of the standard formula, see Chapter 4 page 19.

Also, the standard formula is a function of estimates such as earned premium and technical provisions, which insurers may calculate using different methods.
 
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